There are several ways to take a position in a stock or index, but there come times when you have to decide difference between futures and equity. Making the right choice can help you maximize your benefits
How future trading works
Futures trading in the stock market provides an alternative way to invest or take higher exposure positions compared to equity. It helps you better understand how to enter positions in stocks or indices. However, many beginners lack knowledge about how to use futures effectively in trading and what makes them special compared to equity.
let’s get through via example
If I have ₹2 lakh and I want to take a position in Bajaj Finance, and the price of Bajaj Finance is ₹8,000,
I can simply buy the shares (equity investment).
So, the total shares I will get:
Total shares = ₹2,00,000 / ₹8,000 = 25 shares
However, after deeply analysing the stock using fundamental analysis and seeing strong confirmation on the charts, I want to take a riskier position compared to simply buying the shares. Therefore, I am choosing to take a position in the stock’s futures.
At this point:
CMP – ₹8,000 Investment – ₹2,00,000
Total shares = ₹2,00,000 / ₹8,000 = 25 shares (no changes)
But if I buy the future:
Lot size – 125*
CMP – ₹8,000
Margin – ₹1,80,000*
Here, you have:
125 × ₹8,000 = ₹10,00,000 investment but only need to use ₹1,80,000 as margin.
Here, you can see that by using a margin of just ₹180,000, you are able to buy shares worth ₹1,000,000. This gives you a more leveraged position compared to a standard equity investment.
“In simple terms, buying the futures of any stock or index is similar to buying equity, but there are some key differences.
If the stock price rises by ₹100, the futures price also increases by ₹100.
However, in futures trading, you cannot buy a specific quantity; you must purchase in lot sizes. Not all stocks have futures contracts, and each has a different lot size. Instead of paying the full value, you only need to provide a margin amount.
Most of the time, the margin requirement is around one-fifth of the total value
what is difference Between Future and Equity
Here we understand via taking the Bajaj finance example
For equity position, you pay the entire amount upfront. For example:
Equity Investment Example:
CMP (Current Market Price) = 8000
Investment = 200,000
Total Shares = 200,000 / 8000 = 25 shares
There is no free money in equity investment since you have used the entire amount to buy shares.
Future Trading Example:
Lot Size = 125, Margin = 180,000
Total Value = 125 * 8000 = 1,000,000
With 180,000 as margin, you still have 20,000 as free capital.
In equity, a 200,000 investment gets you 25 shares, whereas in futures, you get 125 shares, which is a key advantage of futures trading.
Key Differences:
MTM (Mark to Market):
When the stock price changes, the profit/loss varies accordingly.
If Bajaj Finance rises by 100 Rs:
Equity Position:
Total Shares = 25
Profit = 25 * 100 = 2,500
Future Position:
Total Shares = 125
Profit = 125 * 100 = 12,500
If Bajaj Finance drops by 100 Rs:
Equity Position:
Total Shares = 25
Loss = 25 * 100 = -2,500
Future Position:
Total Shares = 125
Loss = 125 * 100 = -12,500
Free Fund: 20,000 – 12,500 = 7,500 (remaining free fund)
If the stock rises by 200 Rs:
Equity Investment:
Profit/Loss = 25 * 200 = 5,000
Future Investment:
Profit/Loss = 125 * 200 = 25,000 (MTM)
Free Cash Flow: 20,000 – 25,000 = -5,000 (MTM)
Here, you must add 5,000 on the same day. This is a major difference between futures and equity.
In equity, MTM is not a concern because you have already paid the full amount. Even if the stock price drops, you can wait for recovery. However, in futures, you must pay MTM daily. If the stock price drops by 500 Rs, the MTM will be larger. If you don’t pay MTM, your position will be squared off by the broker.
The Risk Factor:
If the stock drops by 30%:
8000 * 30% = 2400
Equity position
25 Shares * 2400 = 60,000 (unrealized loss)
Future position
125 * 2400 = 300,000 (MTM loss)
“This loss can exceed the total initial investment, resulting in a margin shortfall. Before choosing futures over equity, you must be aware of these risks.
However, if the trade moves in your favour, the potential rewards can be significantly higher than in equity trading. This highlights the high risk associated with futures trading.”
Rollover Cost:
Futures contracts have expiration dates, typically monthly. Future prices are often different for each contract month.
To maintain a long-term position, you need to roll over—sell the current contract and buy the next month’s contract. This transaction costs around 40-50 Rs (5,000-6,000 Rs) each month.
Why Use Futures over equity
Futures are primarily used for trading purposes. If you are super bullish on a particular stock or index, buying futures instead of equity shares allows you to take a larger position with less margin. Since futures provide higher exposure compared to equity, they are widely used for trading rather than long-term investment.
